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MCI, WorldCom Agree to Record $37-Billion Merger

TIMES STAFF WRITER

MCI Communications Inc. accepted a sweetened $37-billion acquisition offer Monday from WorldCom Inc., a record-shattering deal that proponents say could redefine competition in the telecommunications industry.

The merger, approved early Monday by the directors of both companies, appears to cap a furious three-way bidding war that was waged over the last five weeks for ownership of MCI, the nation’s No. 2 long-distance carrier. It would be the biggest corporate merger in history.

If the deal is consummated, the combined company, to be known as MCI WorldCom, would reign as a 70,000-employee behemoth with estimated annual revenues of $32 billion from 22 million customers. The transaction must still pass muster with federal regulators, and it could also be disrupted by a rival offer or a drop in WorldCom’s share price.

The breathtaking acquisition marks a coming of age for upstart WorldCom, which has grown explosively since it was founded in 1983 in Jackson, Miss. It’s also the latest--and perhaps the most important--development stemming from the federal government’s troubled effort to spur competition in the highly regulated telecommunications industry.

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“MCI has the marketing power, name recognition and vast customer base. With WorldCom’s strong presence in local telephone service to businesses, you get a powerful combination,” said Danny Adams, a Washington communications lawyer.

The deal would establish WorldCom as the nation’s second-largest telecommunications firm, behind industry giant AT&T.; It would be positioned to provide long-distance and local service, as well as being one of the dominant firms in Internet services.

WorldCom President Bernard J. Ebbers said he expects the deal to be completed within six months, pending regulatory approval and a vote by the shareholders of both MCI and WorldCom. The merger will also draw a tough antitrust review, presaged only hours after the deal’s announcement when rivals and union officials expressed their opposition.

WorldCom’s aggressive offer for MCI outdistanced a competing cash bid by GTE Corp. by $9 billion and represents a staggering $20-billion premium over the revised offer that British Telecom had put on the table earlier this year.

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WorldCom has gobbled up 40 other telecommunications firms in its zealous growth over the past five years, using the same currency as it has tapped for MCI: its own high-flying stock.

But investors have pushed WorldCom stock lower as the company has increased its offer for MCI over the last month. In trading Monday, WorldCom shares fell $2.13 to $31 per share, down about 13% since WorldCom jumped into the battle for MCI on Oct. 1. Meanwhile, MCI shares soared $4.63 on Monday to $41.50.

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As WorldCom stock drops, the firm has to pay out more of its shares to MCI stockholders, raising WorldCom’s costs in the deal and putting greater pressure on WorldCom to earn higher profits to justify the deal.

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For the deal to be successful, the two firms now must slash costs and outperform even their current torrid rate of growth, analysts said. But WorldCom officials insisted Monday that the deal is not too costly, saying that they have discovered new ways to save money after the merger.

Despite the rich price of the deal, experts said the combination of the two dynamic firms is bound to create a new competitive landscape in the fast-growing industry.

“What this creates is a company that will give AT&T; and the Baby Bells more indigestion,” said Jeff Kagan, a telecommunications analyst who heads his own Atlanta consulting firm. “These two companies have an insatiable appetite for growth and they will surely be moving into new markets.”

It is unclear whether GTE will now throw in the towel. GTE spokesman Bob Bishop declined comment, saying only that “we are reviewing the situation.” But a lawyer close to GTE indicated that the company is not likely to top WorldCom’s offer.

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British Telecom, which will receive $7 billion in cash from WorldCom for the 20% interest it holds in MCI, also gave its blessing to the deal. In addition to earning $2.25 billion during the time it held the MCI shares, BT will pick up $459 million because MCI canceled its contract to merge with BT.

As recently as two weeks ago, BT had vowed that it would not relinquish MCI.

“What happened when you are in a communications revolution is sometimes things don’t always happen in an orderly fashion,” MCI Chairman Bert Roberts said about being courted by three companies and bouncing from offer to offer. “We’ve always known that change was a constant in our business.”

The agreement provides that MCI stockholders, except for British Telecom, will receive $51 of WorldCom common stock for each MCI share, so long as WorldCom trades above $29 a share. If stock falls below that price, MCI shareholders would receive less than $50.99, based on an exchange ratio.

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In addition to paying out $37 billion in stock, WorldCom would assume about $5 billion in MCI debt.

With the stock market hovering at near record highs, MCI favored the higher stock offer from WorldCom, “even though in my opinion [GTE] would bring more strategic cards to the table,” said George Reed Dellinger, a Washington telecommunications experts with HSBC Washington Analysis.

WorldCom said in a statement that it was able to sweeten its previous $30-billion offer for MCI by uncovering “significant new areas of potential savings.” WorldCom officials later estimated they could save about $350 million alone in payments to overseas carriers for long-distance telephone traffic from the U.S. since MCI has negotiated lower-cost deals than WorldCom.

Experts also said the deal will draw antitrust scrutiny, focusing on the combined firm’s international operations and the overall competitive effects of merging the nation’s No. 2 and No. 4 long-distance carriers.

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Although MCI and WorldCom would still be dwarfed by giant AT&T;, regulators--egged on by disgruntled GTE and the Baby Bells--might advocate that either MCI or WorldCom sell long-distance operations where they both offer service or relax the rules for others to enter into the long-distance business.

Under federal rules, Baby Bells are barred from offering long-distance service until they meet a series of conditions showing they have opened their local markets to rivals.

Mort Bahr, president of the Communications Workers of America, has told Vice President Al Gore that he feels the deal is anti-competitive. The union also plans to register its opposition with the Justice Department, said CWA spokesman Jeff Miller.

In a move that gained analysts’ approval, Ebbers will become president and chief executive officer of MCI WorldCom and MCI Chairman Bert Roberts will become chairman.

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* DONE DEAL?

GTE’s prospects; stakes now higher for WorldCom. D1, D17


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